The merger, which values Catalyst Health Solutions at $81.02 a share, or a 28% premium to Tuesday's closing price, comes on the heels of a Federal Trade Commission approval of a blockbuster $29.1 billion acquisition of Medco Health Solutions ( MHS) by Express Scripts ( ESRX) earlier this month that may create the largest player in the space.

"We viewed a deal with CHSI as inevitable, given difficulties small PBMs face scaling up their businesses organically that were particularly daunting for CHSI and their common technology platforms," wrote Bank of America Merrill Lynch analyst Robert Willoughby in a Wednesday note to clients.

As a result of competitive challenges to Catalyst Health Solutions reflected in the company's falling profits, Willoughby expected a deal to materialize at lower prices, but reiterated a "buy" rating and $90 a share price target on SXC Health Solutions shares as a result of high expected synergies.

In a Tuesday research note prior to the deal announcement, Goldman Sachs analysts raised their price target of SXC shares to $91 a share on the potential for a tie up between it and Catalyst Health Solutions. "With the Express-Medco merger closed, we expect consolidation to continue as top PBMs vie to close the market share gap," noted Goldman Sachs.

"Under this backdrop, we see SXCI and CHSI as potential M&A candidates given their (1) relative smaller scale...(2) complementary client mix, and (3) synergy opportunities from lagging profitability metrics."

In the cash and stock offer, SXC will pay Catalyst $28 a share in cash and will make the remaining purchase price in a 0.6606 per share stock conversion. While the deal initially values SXC at $81.02, a share price based on Tuesday's close, the near 8% jump in the company's stock to $86.45 in early afternoon trading makes the offer richer.

When the FTC approved the Express Scripts and Medco Health Solutions merger, the regulator pointed to Catalyst Health Solutions as a fast rising competitor in the pharmacy benefits market, where companies contract work between drug companies and pharmacies to provide prescription drug plans to corporate, government agency and unionized worker health plans. SXC was also considered a competitor in what the FTC characterized as an increasingly competitive space.

In its approval, FTC also highlighted smaller players industry players like Catalyst and SXC Health Solutions as competitors with "recent success winning significant employer business, including large employer accounts." The Express Scripts and Medco Health Solutions merger is still yet to close.

SXC's acquisition may help it soften the possible loss of Health Spring as a customer and add to already high investor expectations for Express Scripts after its Medco acquisition, noted Willoughby of Bank of America.

"The enhanced EPS profile mitigates the risk of a potential loss of its largest customer, Health Spring, although we still view this as unlikely. The deal should also instill greater confidence in Express Scripts' near-term business retention prospects, given what we expect will be more of an internal focus for SXCI/CHSI," Willoughby added.

After losing its largest customer UnitedHealth ( UNH), Medco Health Solutions sought a partner like Express Scripts to combat an expected decline in revenue. The entrance into the PBM market by managed health companies like UnitedHealth, Humana ( HUM), Aetna ( AET) and Cigna ( CIG) presents a new competitive threat to PBMs, noted the FTC in April.

While Catalyst Health Solutions saw its revenue grew over 40% to $5.3 billion in 2011, its profits actually dropped 17% to $67 million on a 43% surge in costs. SXC Health Solutions was able to more than double revenue to $5 billion in 2011, while managing expenses to garner an over 40% rise in profits to $92 million. With Catalyst's added revenue expected to reach $6.3 billion in 2012, according to estimates compiled by Bloomberg, SXC may continue its earnings growth.

Overall, the combined company would have roughly $13 billion in revenue and will provide about 25 million member plans filling over 200 million prescriptions. If the merger, which is expected to close in the second half of 2013 is completed, SXC shareholders would own about 65% of the combined company, and Catalyst shareholders are expected to own approximately 35%.

"This is an extremely compelling combination that brings together SXC's industry-leading tools and technology with Catalyst's full-service P.B.M., best-in-class service and growing client base to create a company that is even better positioned to compete in the marketplace," said SXC's CEO Mark Thierer in a statement.

Lisle, Ill.-based SXC will headquarter the combined company if the deal closes. It said in a statement that the merger should add to earnings in 2013 as a result of cost savings of roughly $125 million within 18 to 24 months after the deal closes. To fund the cash component of the merger, SXC will raise $1.7 billion in debt financing.

SXC was advised by JPMorgan Chase, Barclays. Catalyst was advised by Goldman Sachs and Citigroup.